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Residual dividend policy debated

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Positive NPV projects enhance shareholders' wealth. However, in some cases the payment of dividends limit the number of positive NPV projects a firm can accept. Why, then shouldn't shareholders prefer a residual dividend policy?

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Residual dividend policy and shareholders are correlated in the solution.

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Since profits vary over time, dividends should also vary. Many stockholders, however, rely on dividends to meet expenses.

Under the residual dividend model, dividends are determined as follows:
1. The firm determines its optimal capital budget;
2. ...

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